Battle for the bot­tom

Big guns want to serve the small guy

Finweek English Edition - - INSIGHT - BRUCE WHIT­FIELD brucew@fin­

BY THE TIME South Africa’s big banks re­alised they were miss­ing out on a feed­ing frenzy at the bot­tom end of the bank­ing mar­ket, Capitec had 2m clients and was grow­ing ag­gres­sively, cour­tesy of the ac­tive mar­ket­ing of its of­fer­ing as be­ing the cheap­est in the coun­try. It now has 3m clients trans­act­ing, ei­ther through bor­row­ing or de­posit­ing money.

Af­ter years of fail­ing to ei­ther treat poorer South Africans or take Capitec se­ri­ously, the bank­ing sec­tor – hun­gry for growth – has wo­ken up to the fact that there’s money to be made through push­ing high vol­umes of low-value trans­ac­tions through its in­fra­struc­ture.

How­ever, the big banks will be cau­tious about chas­ing mar­ket share for the sake of it. It learned an ex­pen­sive les­son over the past decade as it un­der­priced credit and al­lowed in­ter­me­di­aries to drive a turf war in the mort­gage sec­tor, which has left a legacy of bad debts. It’s a case of once bit­ten, twice shy.

But the al­lure of a prof­itable new busi­ness line is prov­ing too much to re­sist and now it’s sniffed a profit op­por­tu­nity. How­ever, the battle for the bot­tom of the bank­ing mar­ket is start­ing to turn ugly. That’s illustrated by First Na­tional Bank, which is ag­gres­sively rolling out its Easy Plan of­fer­ing and tak­ing mar­ket leader Capitec to the Ad­ver­tis­ing Stan­dards Au­thor­ity (ASA) over its claims of be­ing SA’s most cost-ef­fec­tive bank­ing of­fer­ing.

The ASA ruled that Capitec should drop its claim. FNB said it proved Capitec wasn’t the cheap­est while the Stel­len­boschbased bank said it had been ky­boshed on a tech­ni­cal­ity rather than on sub­stan­tive proof that FNB charges less. FNB CEO Michael Jor­daan has made no se­cret of the fact that the group has been study­ing the Capitec model for some time. Un­like African Bank, which purely ex­tends loans, Capitec also takes de­posits. That’s part of the magic: it raises longer term de­posits more cheaply than it could through the whole­sale mar­kets by of­fer­ing at­trac­tive rates and lends that money on at con­sid­er­ably higher rates over shorter time pe­ri­ods.

FNB has been the most ac­tive of SA’s Big Four banks in its pur­suit of clients pre­vi­ously con­sid­ered by the in­dus­try as “un­bank­able”. How­ever, Absa is grow­ing its pres­ence in this mar­ket through Absa Trans­act, which is aimed at the same clien­tele. Stan­dard Bank is also ac­tive in this sec­tor; and Ned­bank has also been driv­ing a new mes­sage in an ef­fort to cap­ture more of the lower-end mar­ket.

The suc­cess of the big­ger banks in this mar­ket will be de­ter­mined by whether they’re able to price com­pet­i­tively for risk. Loans tend to be smaller and shorter dated than they’re used to. For ex­am­ple, FNB pro­vides loans from R250 to as much as R60 000, while also of­fer­ing com­modi­tised fu­neral cover.

Capitec’s credit-scor­ing mech­a­nisms and ef­fec­tive use of tech­nol­ogy have also thus far stood it in good stead.

What the big­ger banks have that Capitec does not is the po­ten­tial to grad­u­ate the best of those clients over time to its higher mar­gin up-mar­ket of­fer­ings. To use a cricket anal­ogy: SA’s big banks ap­pear con­tent to play five-day test matches rather than try­ing to em­u­late the more gar­ish T20 for­mula.

MICHAEL JOR­DAAN Study­ing the Capitec model

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